What the Heck is a HECM?!

With over 350,000 older adults purchasing a primary residence for retirement each year, would a program that allows them to purchase that home for a fraction of the price be of interest to them, members of the baby boom generation?

Would they continue to be interested if they were not required to make a monthly mortgage payment…ever?

Watch this video to learn how Tom & Sarah purchased their dream home:

As difficult as it may be to believe, such a program is available; however, few retirees, real estate professionals, or home builders know it exists. It’s a safe, government insured home equity conversion mortgage (HECM) that allows home owners to use the equity from the sale of their previous home, or money from their savings, to fund the down payment to purchase a replacement home with no monthly mortgage payment.

Scott Trembley, founder and CEO of The Trembley Group Real Estate in Myrtle Beach, South Carolina is a national expert on the HECM mortgage. He was recently featured at a National Association of Realtors webinar originating out of Washington, DC on using the HECM in real-estate transactions. The audience was primarily other Realtors from across the country and the webinar revealed that real estate professionals have many of the same questions about the program as potential buyers and borrowers.

The home equity conversion mortgage for purchase transaction — HECM for purchase or H4P for short — represents a “powerful” tool for real estate professionals, Trembley said during his webinar, noting that many of the agents at his firm who learn about the program realize how many of their past clients it could have helped and the potential sales it could have helped them close.

The HECM for Purchase is a Federal Housing Administration (FHA) insured home loan that allows adults 62 or better to use the equity from the sale of a previous residence to buy their next primary home in one transaction. FHA’s involvement with the program creates a high level of safety for the program and the home buyer.

“It brings, as a Realtor, a whole other level of respect,” Trembley said, adding that “clients feel more confidence in an agent if he or she explains HECM for purchase alongside other potential funding options — whether they eventually use an H4P to buy a home or not.”

“This program will add to your portfolio for sure, as a Realtor,” he said.

As you will see in this video, a perfect example of how HECM can make a significant difference in someone’s life is a gentleman, John, from New York who had attempted for over two years to sell his home with no success.

With a large mortgage balance he was fearful he was stuck in his current home until he learned about HECM. He lowered his price, purchased a home in a retirement community using HECM, made a down payment from the sale proceeds, and had money left over to pay for his move. And equally important, he now has no mortgage payment.

Larry Reed, manager of the Retirement Funding Solutions office in Myrtle Beach said during a recent telephone conversation, “One of my biggest challenges is educating Real Estate professionals. The HECM is a product that that could be of enormous benefit to them and their customers if they understood it.” Larry is a HECM expert and Retirement Funding Solutions deals exclusively in HECM mortgages. He went on to say, “Educating both borrowers and real estate professionals is vital to the expansion of the H4P program. As people learn about HECM, they love it as an option whether they use it or not. The program was first introduced in 2009, but H4P mortgages only account for a small portion of HECM loans issued since then.

Of course for several of those years, home sales were not particularly strong. Through education, attention to detail and quick closings, my company has managed to make H4Ps a cornerstone of our business. We led the nation in H4P endorsements last year, capturing a 12% market share, almost twice the market share of our nearest competitor.”

“Retirees are aware they have the same options for buying a home as anyone else: qualify for a conventional mortgage with a down payment and regular monthly mortgage payments or pay all cash. However, most of them are not aware they have a third option, the HECM for purchase.”

Reed continued, “Using HECM for purchase to buy a primary residence, they will make a one-time down payment of roughly half the purchase price with no mortgage payments. This can dramatically change their purchasing power to buy the home they really want and keep more assets available for their retirement.”

“The initial two purchase options often do not work, since a 30-year mortgage is either impractical or impossible for folks to obtain as the mortgage payments are required for 30 years and they are no longer working which is often required to qualify for a mortgage. As for the cash buyer, the funds may not be available to purchase the desired home outright. And, if the cash is available, it is often set aside to provide income for their retirement years. Making monthly mortgage payments gradually reduces those funds and depletes their assets. One of the principal fears for older adults is running out of money. They are often on a fixed income and would like to enjoy their retirement with fewer financial pressures.

Another example of the HECM creating a big win was for a couple with the intention of moving near the beach. They sold their home and had proceeds from the sale of approximately $250,000. Their plan was to invest $200,000 in a new home and add $50,000 to their retirement assets. As they began the home search, they were very disappointed until being introduced to HECM. Using HECM they were able to purchase a new dream home for about $380,000, make the down payment required by HECM, and put about $80,000 aside for additional retirement assets. Needless to say they are thrilled.

One of the most important and key benefits that both Trembley and Reed emphasized is the ability to use a HECM to buy a home without having to wait for an existing property to sell. Trembley gave an example of an older couple looking to move to be closer to their grandchildren. They needed the proceeds from the sale of their existing home before they could buy a new property, but they were having trouble finding takers at their asking price.

Instead of waiting, Trembley said, the couple used a HECM for purchase loan to secure the funds necessary to buy their new home, then lowered the price on their existing home in order to sell it more quickly.

Let’s Cover The Nuts & Bolts of the HECM

“Regardless of how long they live in the home or what happens to the home’s value, they only make one, initial investment (down payment) towards the purchase. With the mortgage payment eliminated, they can step-up to a nicer home than they thought possible, and they can preserve their cash. Isn’t that an interesting proposition?”

As you will hear in this video testimonial, one couple found virtually that exact situation. Cathy and Tim sold their condo in Chicago with an existing mortgage of about $175,000. Their important desire was to have no mortgage payment…which they did not think was possible. Meanwhile, it was.

When they learned about HECM, they found a dream home for about $315,000. With a down payment of about $140,000, they added about $34,000 to their nest egg and now have no mortgage payment for the rest of their life.

The amount available from the HECM for the borrower depends on four factors: the age of the youngest person (if a couple is involved), current interest rates, appraised value of the home, and government imposed lending limits which today are $636,150. Those factors are plugged into a model provided by FHA and the result is the amount that can be borrowed and the amount of down payment required. At least one of the borrowers must be 62. The older the borrowers are the less amount of down payment is required.

The credit review does not rely on credit scores like traditional lending. The HECM is focused on the payment of taxes, insurance and homeowner’s association dues being on time for the previous 24 consecutive months. Any housing payments and installment debt must be on time for 12 months. Consumer debt needs to be managed well with no major derogatory credit in the past 12 months. Any payments that are 90 days late or 3 times 60 day late will be reviewed and can be reasons for folks not to qualify for the HECM.

Fortunately, employment is not important for HECM customers since most of them are retired. The focus is more on the source and expectation for continuation of income. For example, social security income is expected to be received for the rest of a person’s life.

HECM is not a gift or grant from the government. The unpaid interest plus FHA mortgage insurance are added to the balance of the loan as it accrues. HECM borrowers are required to pay their real estate taxes, home owners insurance, and home owners association dues if they are required just like any other homeowner. Upkeep and maintenance of the home is required…just as if the home was owned free and clear.

An option with the HECM is to make payments if the buyer choses. That would reduce the accrual of the interest and FHA insurance to the loan balance. The loan balance would be smaller leaving more equity for the heirs. The important thing is these payments are purely optional and can be made for any amount at any time…or not. Most folks do not make payments and keep the money for their retirement to be used as they choose.

The concern for their heirs was an important consideration for one couple, Tom and Linda, moving from New England. Their initial intention was to pay all cash until they learned about HECM and saved that money for their financial freedom, plus their children.

They felt the additional funds from using HECM could be used for their own financial freedom and to share with their children now rather than as part of an estate. They fell in love with a home for about $330,000 that required a down payment of about $166,000 leaving about $164,000 for them and their children to share now.

Reed Addresses Some Common Misconceptions About the HECM Program

The home is not owned by the lender when a HECM loan closes. “Mortgage lenders are in the business of making loans and earning interest, not owning homes.” Reed said. “The mortgage lender has a lien on the property but the homeowner keeps the title to the property just like a traditional mortgage.”

“With a HECM, the estate inherits the home as usual when the owners die,” Reed emphasized. “One of the real benefits for a couple who are on title together is if one passes away, the home automatically transfers to the remaining partner for their life time. Like any property with a mortgage, there will be a lien on the title for the amount of the mortgage plus accrued interest and the mortgage insurance premium. All the remaining equity is inherited by the estate.”

The Heirs Will Have 3 Options When the Final Owner Dies

One is to pay off the loan balance like they would a conventional mortgage and take over ownership of the home.

The second is to sell the home and the balance of the proceeds will go to the estate for distribution.

A third option is unique to HECM and a true benefit to the home owner and their heirs. Let’s assume the owners live a long time or home values are in distress like 2008 and the loan balance is larger than the value of the property. If they had a traditional mortgage, the balance would have to be paid to the lender. With the HECM, the heirs can simply return the property to the lender with no responsibility to repay the loan. The lender will submit the loan to FHA so they can be repaid. In this case, the benefit of the FHA insurance is it protects the heirs and the estate. The HECM borrower will never owe more than the loan balance or the value of the property, whichever is less. No other assets in the estate can be used to repay the loan balance. This is known as “non-recourse” and simply means that the borrower (or estate) does not repay the balance when it is due. Neither the heirs nor the estate are liable for any deficiency. If the estate has other assets for example, they cannot be demanded by FHA to repay the loan. Only the home will be used to repay the loan.

Reed gave an example. “Let’s assume someone owns a home with a $160,000 loan balance. If the homeowner passes away and the estate sells the home for $300,000, the lender is repaid the $160,000 they are owed and the estate inherits the remaining $140,000 less any expense of selling the home. If the sale of the home is not enough to pay off the loan balance, the lender will submit the loss and request reimbursement from the FHA. No other assets in the estate are affected by the mortgage. Investments, life insurance, cars, and other valuable possessions cannot be taken to pay off the HECM loan.”

This is very important for estate planning consideration.

Said another way, the death of the home owners will not leave the estate with a financial burden because of the HECM loan.

Will I Be Evicted or Foreclosed?

The HECM was created specifically to allow older adults to live in their home for the rest of their lives.

The homeowner will not be evicted or foreclosed so long as the borrower meets the obligations of the loan.

For example, the borrower must live in the home as their primary residence, continue to pay property taxes, homeowners insurance, HOA dues, and maintain the home according to Federal Housing Administration requirements. If these simple conditions are met, the homeowner can stay in their home for the rest of their life. The HECM only becomes due when all homeowners have moved out of the property for 12 consecutive months or have passed away.

What If I Am on Medicare?

Government entitlement programs such as Social Security and Medicare are usually not affected by a HECM mortgage. “Keep in mind that needs-based programs like Medicaid can be affected,” Reed added. It’s best to consult with a qualified financial advisor to learn how a HECM mortgage might affect eligibility for some government benefits.

What Are the Closing Costs for HECM?

The closing costs for HECM are very similar to a conventional mortgage except for FHA insurance.

The purpose of FHA insurance is to guarantee all of the program benefits for the home owner, their heirs, and to protect the government from unforeseen losses from the program. Most of the closing costs for a HECM can be financed in the loan. That means the out of pocket costs are minimal.

Is the HECM Available for Existing Homes as well as New Construction?

Yes, it is available for both.

A reminder is the property must be a primary residence.

An example of using HECM for new construction is a lady from the southwest and the challenges she faced. When building a new home, all of the options can become over whelming and price can become an issue. Then she learned about HECM. She was able to comfortably add about $60,000 of options that were important to her, include them in her purchase price of about $360,000, make a down payment of $165,000, and have a dream home with no mortgage payment for the rest of her life.

The Trembley Group Real Estate and Retirement Funding Solutions are not Federal income tax experts and always recommend that their clients consult a tax advisor for more information.

Reed concluded, “A HECM for purchase allows older Americans to buy a home that better suits their needs without investing all their retirement assets into it. Transactions can even be structured for buying a new home before the current home is sold in some cases. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage and were required to make monthly mortgage payments.”

“A HECM for Purchase is not just a mortgage product. It’s a financial tool for retirees,” says Reed. “It gives retirees much more purchasing power and doesn’t force them to drain all their assets to make a down payment with monthly mortgage payments or a large payment from assets when paying all cash for the home. It also gives them the option to buy a home with all the upgrades they want along with no mortgage payment. All they need is a real estate professional and a mortgage professional with the experience and expertise about HECM who can explain the program to them. Once they understand it, they will decide if HECM is right for their situation.”

Need help? Call The Trembley Group at 843.945.1880 ext. 100 and we’ll help you look for the perfect listing or buyers agent!

At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice.

4 Responses to “What the Heck is a HECM?!”

Rick White

The Trembley Group

Hi Rick, I have forwarded your request to your Trembley Group Sales Executive, Holly Schreiber, and to our HECM Representative, Larry Reed. They will be in touch soon. Thank you for reaching out for more information. The HECM is such a powerful tool to purchasing the home of your dreams.

Lin T

Very interested in this program and also have my sights set on moving to your area when my youngest graduates in 2019…..not long away and trying to figure out how to do it as a solo retiree. Please send booklet. Thank you.